RENTS THEY ARE A’ RISING

No-one can pretend that the last decade has been easy in the world of commercial property.  Ten years ago we were in the midst of one of the deepest recessions since the Second World War, and just as we emerged from that with some measure of optimism, the political and economic tornado that was Brexit caused confidence to take a knock and certainty to retreat out of sight.

The result was a distinct lack of growth in rental income for investors, and whilst this may have meant (in some cases) attractive rents for occupiers, this has to be set in the context of difficult trading conditions for many businesses.

The good news is that we have now emerged from that difficult decade, and now with a level of political certainty which we haven’t seen for some time, and a buoyant economy, investors are now quite reasonably looking to achieve a real value return on their investments.

In short, those facing a rent review in 2020 could potentially see some big increases.  The issue is focussing the minds of both landlords and tenants from opposing positions of measuring returns and keeping costs sustainable.

This needs to be put in context.  For example, office rents saw huge growth in the 1980s, ending that decade at around £14.50 per square foot for Grade A premises in Norwich.  When the recession hit, they dropped back, and it was not until as recent as 2017 that they started hitting the levels last seen in Mrs Thatcher’s final years. 

Unsurprisingly, in a rising market, investors want to see rents at levels higher than they were three decades ago.  So those currently enjoying historically attractive rent levels should expect robust negotiations at their next review, whether they are a landlord seeking an increase, or a tenant looking to minimise their costs.

In the industrial sector the effect is even more marked.  Prime rents have risen from around £5.75 to £8.00 per sq ft in some cases in the last five years.  Many occupiers who last had a rent settlement in the early to mid 2010s may then have seen a zero rise, or even a fall.  This time around they could expect a significant rise.

All of this is driven by buoyant demand for space, and a decline in supply caused by space being taken out of the market by Permitted Development Rights, and by a simple dearth of speculative development in Norfolk.

Going into such tough rent negotiations, both landlords and investors need to be well-informed about the market in order to know where to pitch their respective positions.  Investors going in badly-prepared risk missing out on the chance to achieve a proper return on their investment, and occupiers risk seeing their costs spiral.  Professional help with rent reviews has never been so important.

Nick Williams | Partner - Commercial Management and Valuations Surveyor